Simplifying Investing: Five All Cap ETF Options

ETFs have burst onto the investing scene in part because they allow for a tremendous simplification of the portfolio construction process. Even relatively novice investors are able to construct a well-diversified, balanced portfolio with just a handful of tickers, eliminating a slew of unnecessary expenses in the process.

For most investors with a high or moderate risk tolerance, the domestic equity component of a portfolio will receive the largest weighting, and is generally broken down into at least three buckets: small, mid, and large caps. But some take simplicity to the extreme, electing to achieve the entirety of their domestic equity exposure through a single fund [see Low Cost ETFs: Complete List Of The Cheapest Exchange-Traded Funds].

Before the widespread adoption of ETFs, such a step may have bordered on insanity. But now there are a number of options that include exposure to thousands of individual securities within a single basket, allowing investors to essentially own the entire market without worrying about overlapping exposure to specific stocks or individual sectors. Because most all cap equity funds are linked to cap-weighted benchmarks, they tend to exhibit a tilt towards large cap equities. But also included are mid and small cap equities, ensuring some degree of balance across different market capitalizations.

Vanguard offers the most popular ETF for investors looking to take a “one stop shop” approach to domestic equity exposure. VTI, which has assets of approximately $14 billion, seeks to replicate the performance of the MSCI US Broad Market Index. That index represents 99.5% or more of the total market capitalization of all of the U.S. common stocks regularly traded on the New York and American Stock Exchanges and the Nasdaq over-the-counter market. VTI has more than 3,300 holdings, and spreads exposure across all sectors of the market.

Although VTI has more than 250 million shares outstanding, it isn’t all that surprising that only about 2 million trade hands daily; this fund is clearly a favorite of buy-and-holders. With an expense ratio of just 7 basis points, VTI is one of the cheapest funds on the market [see Race For Cheapest ETFs Heats Up].

iShares’ IWV tracks the popular Russell 3000 Index, a cap-weighted benchmark that includes the 3,000 largest companies domiciled in the U.S. As such, there is considerable overlap between this fund and VTI; these two funds have a near perfect correlation. IWN also has a good balance across various corners of the market; financials receives the largest allocation at 16%, while utilities makes up less than 4% of the total. From an expense perspective, IWN is attractive but doesn’t offer quite the bargain that VTI does; this iShares ETF charges 0.21% [see ETFs vs. Mutual Funds: Breaking Down Expense Ratios].

FAD seeks to replicate the performance of the Defined Multi Cap Growth Index, an “enhanced” index created and administered by Standard & Poor’s that selects stocks from the S&P Composite 1500/Citigroup Growth Index. This ETF utilizes the proprietary AlphaDEX methodology to rank components of the S&P 500 Growth Index, S&P MidCap Growth Index, and S&P SmallCap 600 Growth Index. The bottom 25% from each component index are tossed out, with the remainder used to make up the benchmark.

That’s not where the construction process stops; components of the S&P 500 Growth Index account for 50% of total weighting, with the members of the S&P MidCap 400 Growth Index and S&P SmallCap 600 Growth Index accounting for 30% and 20%, respectively. Selected stocks are broken into quintiles based on rankings, with the top-ranked quintiles receiving a larger weighting within the index.

This fund is a new addition to the ETF scene, launching in March 2009. WFVK seeks to replicate the Wilshire 5000 Total Market Index, one of the broadest measures of U.S. equity market performance. The name of the index is somewhat misleading; as of January 2010, this index consisted of about 4,000 individual securities. WFVK doesn’t pursue a full replication; this fund has about 1,200 total holdings [see WFVK's fact sheet].

Fidelity’s lone ETF offering seeks to replicate the performance of the NASDAQ Composite Index, a benchmark that includes all domestic and international based common stocks listed on the Nasdaq Stock Market. Unlike some of the other funds found on this list ONEQ maintains a bit of a sector bias. Hardware accounts for more than a quarter of assets, with software (17%) and health care (13%) also making up big chunks.

ONEQ’s largest holdings are well known stocks like Apple and Microsoft, but this fund has more than 2,000 individual components, including many mid and small cap stocks [see ONEQ's holdings].